Pages

Monday, December 15, 2014

As an accountant turned journo, I try to ensure the creative accounting
used to make the budget figures look better than they really are doesn't
go unexposed. But I've never seen a con as audacious as the proposed
medical research future fund.

I wrote at length about all the
accounting tricks perpetrated by the Gillard government, but now it's
the Abbott government's turn.

In their budget update during last
year's election campaign, the heads of Treasury and Finance signed off
on a deficit estimate for 2013-14 of $30 billion. But four months later
Joe Hockey and Mathias Cormann popped up with their own mid-year review
claiming the deficit they'd inherited would be closer to $47 billion.

Today
you'll hear Hockey repeat that claim. But that higher number was
largely the result of our heroes indulging in a little creative
accounting of their own.

About $7 billion of the $17 billion
increase since the election was explained by Treasury revising down its
forecasts for employment and wage growth and, hence, tax collections.
Fair enough. But most of the remaining $10 billion involved dubious
transactions our heroes claimed to have been forced to make because
Labor had left them hanging.

The biggest was a transfer of $8.8
billion to the Reserve Bank - an amount the Reserve hadn't asked for and
Treasury had recommended against. Its effect was to make Labor's last
deficit look bigger and to make it easier for the Reserve to pay higher
dividends into Hockey's subsequent budgets.

When in this year's
budget Hockey announced the GP co-payment and various other cuts in
health spending, he explained that these savings would be put in a new
medical research future fund.

Once the money in the fund had built
up $20 billion, the annual interest on the money in the fund would be
used to pay for medical research. But under the changes announced last
week, these payments from the net interest earned would instead begin in
2015-16.

This is an accounting trick, but it seems only students
of government accounting rules can see it. People think that since the
savings are being spent building up the fund, there won't be any net
saving to the budget until after the $20 billion target has been
reached.

Not so. The saving to the budget bottom line is
immediate, though the change means this saving will be reduced a
fraction by the increased spending on research.

Like many budget
fiddles, this one relies on exploiting loopholes in the definition of
the bottom line, the "underlying cash deficit".

The best way of
thinking of it is that transactions recorded "above the line" affect the
size of the deficit, whereas those recorded "below the line" don't.
Below-the-line transactions are regarded as affecting only the way the
deficit is financed.

The Medicare spending cuts are recorded above
the line, but the decision to put an amount of money equivalent to
those savings into a special fund goes below the line. It is, after all,
only a decision to move money around the government's balance sheet. It
doesn't involve the government spending a cent, just moving money
between its accounts.

Of course, since the government is in
deficit, it doesn't actually have any money to put into its medical
research future fund account. So to its normal borrowing to cover the
deficit it will have to add borrowing to finance the money it puts into
the research fund.

This extra will add to the size of its gross
public debt, but not to its net debt, since the latter is the gross debt
(everything the government owes other people) minus all the money in
the various parts of the future fund, which has been used to buy shares
and bonds, and so represents all the money other people owe the
government.

However, when the government spends the interest on
the medical fund on medical research, this spending will be recorded
above the line and so will add to the deficit.

Once the dust has
settled, however, I expect to see a second leg of the trick brought to
fruition. In a subsequent budget the government may decide that, now
it's spending more on medical research via the future fund, it's able to
spend less on medical research via the National Health and Medical
Research Council. This brilliant con job will be complete.

What's
the point of it all? Partly it's an attempt to bamboozle doctors, but
mainly it's designed to allow the government to break its election
promise not to cut health spending while claiming it hasn't broken it,
just "reprioritised" health spending.